How does bitcoin solve the deflation problem?

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LifeExplorer
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How does bitcoin solve the deflation problem?

Post by LifeExplorer »

I can't wrap my head around this.

I google and read a few articles but all of them are just pitching for the wondercoin.
Astones
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Re: How does bitcoin solve the deflation problem?

Post by Astones »

I guess that the best case scenario for the crypto fans is that it will eventually stabilize at a much higher plateau than what it is right now and become the main currency, so they'll be rich by then.
senex
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Re: How does bitcoin solve the deflation problem?

Post by senex »

Bitcoin itself, being an anonymous algorithm, doesn't have an official position.

The arguments I've heard from some of its advocates is that the "deflation problem" isn't actually a problem. People have routinely bought things, even when they expected it to be cheaper next year: computers, phones, etc.

If you want to understand the arguments between mainstream economics (which is pro-debasement) and sound money, try reading some articles about the Austrian school of economics (Mises, etc).
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LifeExplorer
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Re: How does bitcoin solve the deflation problem?

Post by LifeExplorer »

Astones wrote: Mon May 03, 2021 4:07 pm I guess that the best case scenario for the crypto fans is that it will eventually stabilize at a much higher plateau than what it is right now and become the main currency, so they'll be rich by then.
How can they stabilize?
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LifeExplorer
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Re: How does bitcoin solve the deflation problem?

Post by LifeExplorer »

senex wrote: Mon May 03, 2021 4:10 pm Bitcoin itself, being an anonymous algorithm, doesn't have an official position.

The arguments I've heard from some of its advocates is that the "deflation problem" isn't actually a problem. People have routinely bought things, even when they expected it to be cheaper next year: computers, phones, etc.

If you want to understand the arguments between mainstream economics (which is pro-debasement) and sound money, try reading some articles about the Austrian school of economics (Mises, etc).
They buy things and expect them to be cheaper because those things have immediate utility and the cost is not very high.

Would a company invest 10 million in Bitcoin currency knowing it would only cost them 9 million next year?
grok87
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Re: How does bitcoin solve the deflation problem?

Post by grok87 »

senex wrote: Mon May 03, 2021 4:10 pm Bitcoin itself, being an anonymous algorithm, doesn't have an official position.

The arguments I've heard from some of its advocates is that the "deflation problem" isn't actually a problem. People have routinely bought things, even when they expected it to be cheaper next year: computers, phones, etc.

If you want to understand the arguments between mainstream economics (which is pro-debasement) and sound money, try reading some articles about the Austrian school of economics (Mises, etc).
https://en.wikipedia.org/wiki/Cross_of_Gold_speech
wrote: You shall not crucify mankind upon a cross of gold
RIP Mr. Bogle.
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Re: How does bitcoin solve the deflation problem?

Post by txhill »

I like bitcoin but I also have no idea how it will really work in practice with wider adoption, although I suspect it will even if there is nothing quite like it in the known universe. Some people advocate thinking of bitcoin as a store of value more akin to art than gold--capable of actual uniqueness and a capped supply. In that sense, the Mona Lisa is priceless because everyone seems to like it, and the Louvre won't ever sell it for a quick buck, but the Mona Lisa's pricelessness doesn't exactly destabilize the entire financial system, either. I don't think the answer to this question is capable of an easy answer anyway.
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Re: How does bitcoin solve the deflation problem?

Post by Jeff Albertson »

Bitcoin, a solution still in search for a problem.
adamthesmythe
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Re: How does bitcoin solve the deflation problem?

Post by adamthesmythe »

> How does bitcoin solve the deflation problem?

Did somebody say that? Did they say why?
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vitaflo
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Re: How does bitcoin solve the deflation problem?

Post by vitaflo »

txhill wrote: Mon May 03, 2021 5:17 pm I like bitcoin but I also have no idea how it will really work in practice with wider adoption, although I suspect it will even if there is nothing quite like it in the known universe. Some people advocate thinking of bitcoin as a store of value more akin to art than gold--capable of actual uniqueness and a capped supply. In that sense, the Mona Lisa is priceless because everyone seems to like it, and the Louvre won't ever sell it for a quick buck, but the Mona Lisa's pricelessness doesn't exactly destabilize the entire financial system, either. I don't think the answer to this question is capable of an easy answer anyway.
But the Lourve does make a quick buck off the Mona Lisa by selling access to it. In that sense the Mona Lisa generates cash flow, something bitcoin does not.

That said, I'm not sure the deflation problem of bitcoin is something that must be solved. It is what it is and deflation will just be one of the things it's judged on. It may be a problem if bitcoin was trying to be used as a currency perhaps, but in general it hasn't been (perhaps this is part of the reason).
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Re: How does bitcoin solve the deflation problem?

Post by txhill »

vitaflo wrote: Mon May 03, 2021 6:26 pm
txhill wrote: Mon May 03, 2021 5:17 pm I like bitcoin but I also have no idea how it will really work in practice with wider adoption, although I suspect it will even if there is nothing quite like it in the known universe. Some people advocate thinking of bitcoin as a store of value more akin to art than gold--capable of actual uniqueness and a capped supply. In that sense, the Mona Lisa is priceless because everyone seems to like it, and the Louvre won't ever sell it for a quick buck, but the Mona Lisa's pricelessness doesn't exactly destabilize the entire financial system, either. I don't think the answer to this question is capable of an easy answer anyway.
But the Lourve does make a quick buck off the Mona Lisa by selling access to it. In that sense the Mona Lisa generates cash flow, something bitcoin does not.

That said, I'm not sure the deflation problem of bitcoin is something that must be solved. It is what it is and deflation will just be one of the things it's judged on. It may be a problem if bitcoin was trying to be used as a currency perhaps, but in general it hasn't been (perhaps this is part of the reason).
I have been making around 5-6% APY on my bitcoin by selling access to it (aka lending on Blockfi)--so it actually is kind of like the Mona Lisa in that way too. I'd say you can't touch bitcoin which sets it apart from the Mona Lisa, but no one really touches the Mona Lisa either... But yes agree with you on whether it's really a problem or not--seems like it's a positive feature of bitcoin to me.
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Re: How does bitcoin solve the deflation problem?

Post by LifeExplorer »

vitaflo wrote: Mon May 03, 2021 6:26 pm
txhill wrote: Mon May 03, 2021 5:17 pm I like bitcoin but I also have no idea how it will really work in practice with wider adoption, although I suspect it will even if there is nothing quite like it in the known universe. Some people advocate thinking of bitcoin as a store of value more akin to art than gold--capable of actual uniqueness and a capped supply. In that sense, the Mona Lisa is priceless because everyone seems to like it, and the Louvre won't ever sell it for a quick buck, but the Mona Lisa's pricelessness doesn't exactly destabilize the entire financial system, either. I don't think the answer to this question is capable of an easy answer anyway.
But the Lourve does make a quick buck off the Mona Lisa by selling access to it. In that sense the Mona Lisa generates cash flow, something bitcoin does not.

That said, I'm not sure the deflation problem of bitcoin is something that must be solved. It is what it is and deflation will just be one of the things it's judged on. It may be a problem if bitcoin was trying to be used as a currency perhaps, but in general it hasn't been (perhaps this is part of the reason).
A currency must be:
1. Relatively stable in relation to the goods and services it represents - you can't have a situation where one buys a chicken for $1 and tomorrow the $1 buys a house.
2. Inflatable as more wealth is being created.
3. Widely accepted either by fiat or tradition.

Bitcoin does none of these.
grok87
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Re: How does bitcoin solve the deflation problem?

Post by grok87 »

LifeExplorer wrote: Mon May 03, 2021 6:31 pm
vitaflo wrote: Mon May 03, 2021 6:26 pm
txhill wrote: Mon May 03, 2021 5:17 pm I like bitcoin but I also have no idea how it will really work in practice with wider adoption, although I suspect it will even if there is nothing quite like it in the known universe. Some people advocate thinking of bitcoin as a store of value more akin to art than gold--capable of actual uniqueness and a capped supply. In that sense, the Mona Lisa is priceless because everyone seems to like it, and the Louvre won't ever sell it for a quick buck, but the Mona Lisa's pricelessness doesn't exactly destabilize the entire financial system, either. I don't think the answer to this question is capable of an easy answer anyway.
But the Lourve does make a quick buck off the Mona Lisa by selling access to it. In that sense the Mona Lisa generates cash flow, something bitcoin does not.

That said, I'm not sure the deflation problem of bitcoin is something that must be solved. It is what it is and deflation will just be one of the things it's judged on. It may be a problem if bitcoin was trying to be used as a currency perhaps, but in general it hasn't been (perhaps this is part of the reason).
A currency must be:
1. Relatively stable in relation to the goods and services it represents - you can't have a situation where one buys a chicken for $1 and tomorrow the $1 buys a house.
2. Inflatable as more wealth is being created.
3. Widely accepted either by fiat or tradition.

Bitcoin does none of these.
yep. 2. is the problem for gold
RIP Mr. Bogle.
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JoMoney
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Re: How does bitcoin solve the deflation problem?

Post by JoMoney »

If Bitcoin was used as a currency it would be inflationary. Dollars, euros, yen, dollarydoos, etc.. aren't going away, Bitcoin would just be more money in circulation within the domains those currencies already exist... but just about nobody actually uses Bitcoin as a currency so the whole question is beyond hypothetical.
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LifeExplorer
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Re: How does bitcoin solve the deflation problem?

Post by LifeExplorer »

grok87 wrote: Mon May 03, 2021 7:31 pm
LifeExplorer wrote: Mon May 03, 2021 6:31 pm
vitaflo wrote: Mon May 03, 2021 6:26 pm
txhill wrote: Mon May 03, 2021 5:17 pm I like bitcoin but I also have no idea how it will really work in practice with wider adoption, although I suspect it will even if there is nothing quite like it in the known universe. Some people advocate thinking of bitcoin as a store of value more akin to art than gold--capable of actual uniqueness and a capped supply. In that sense, the Mona Lisa is priceless because everyone seems to like it, and the Louvre won't ever sell it for a quick buck, but the Mona Lisa's pricelessness doesn't exactly destabilize the entire financial system, either. I don't think the answer to this question is capable of an easy answer anyway.
But the Lourve does make a quick buck off the Mona Lisa by selling access to it. In that sense the Mona Lisa generates cash flow, something bitcoin does not.

That said, I'm not sure the deflation problem of bitcoin is something that must be solved. It is what it is and deflation will just be one of the things it's judged on. It may be a problem if bitcoin was trying to be used as a currency perhaps, but in general it hasn't been (perhaps this is part of the reason).
A currency must be:
1. Relatively stable in relation to the goods and services it represents - you can't have a situation where one buys a chicken for $1 and tomorrow the $1 buys a house.
2. Inflatable as more wealth is being created.
3. Widely accepted either by fiat or tradition.

Bitcoin does none of these.
yep. 2. is the problem for gold
Right, which is why gold is no longer the currency.
grok87
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Re: How does bitcoin solve the deflation problem?

Post by grok87 »

LifeExplorer wrote: Mon May 03, 2021 8:52 pm
grok87 wrote: Mon May 03, 2021 7:31 pm
LifeExplorer wrote: Mon May 03, 2021 6:31 pm
vitaflo wrote: Mon May 03, 2021 6:26 pm
txhill wrote: Mon May 03, 2021 5:17 pm I like bitcoin but I also have no idea how it will really work in practice with wider adoption, although I suspect it will even if there is nothing quite like it in the known universe. Some people advocate thinking of bitcoin as a store of value more akin to art than gold--capable of actual uniqueness and a capped supply. In that sense, the Mona Lisa is priceless because everyone seems to like it, and the Louvre won't ever sell it for a quick buck, but the Mona Lisa's pricelessness doesn't exactly destabilize the entire financial system, either. I don't think the answer to this question is capable of an easy answer anyway.
But the Lourve does make a quick buck off the Mona Lisa by selling access to it. In that sense the Mona Lisa generates cash flow, something bitcoin does not.

That said, I'm not sure the deflation problem of bitcoin is something that must be solved. It is what it is and deflation will just be one of the things it's judged on. It may be a problem if bitcoin was trying to be used as a currency perhaps, but in general it hasn't been (perhaps this is part of the reason).
A currency must be:
1. Relatively stable in relation to the goods and services it represents - you can't have a situation where one buys a chicken for $1 and tomorrow the $1 buys a house.
2. Inflatable as more wealth is being created.
3. Widely accepted either by fiat or tradition.

Bitcoin does none of these.
yep. 2. is the problem for gold
Right, which is why gold is no longer the currency.
nor shall bitcoin be
RIP Mr. Bogle.
senex
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Re: How does bitcoin solve the deflation problem?

Post by senex »

LifeExplorer wrote: Mon May 03, 2021 4:52 pm Would a company invest 10 million in Bitcoin currency knowing it would only cost them 9 million next year?
Maybe I misunderstood what you meant by "the deflation problem."

The supply of dollars is increasing, and the supply of bitcoin is fixed, so one would expect bitcoin to be worth more dollars each year, if other aspects of supply/demand remain fixed; equivalently, one would expect a bitcoin to buy more goods next year, and a dollar to buy fewer goods next year.
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Re: How does bitcoin solve the deflation problem?

Post by senex »

LifeExplorer wrote: Mon May 03, 2021 8:52 pm
2. Inflatable as more wealth is being created.
yep. 2. is the problem for gold
Right, which is why gold is no longer the currency.
None of these statements is strictly true. Inflation is not necessary for wealth creation. It is mainly useful to those who want lots of foreign wars, bread, and circuses.

Economics has "physics envy," and proffers more certainty than it ought, especially among amateurs. The story of gold is quite complicated.
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Re: How does bitcoin solve the deflation problem?

Post by alluringreality »

senex wrote: Tue May 04, 2021 8:55 am The supply of dollars is increasing, and the supply of bitcoin is fixed
Actually the supply of Bitcoin is also still increasing at this time, as new blocks are mined. The supply of Bitcoin is planned to be fixed in the future, and the plan is for transaction cost to supplant mining. Generally people pay to transact Bitcoin, while I can transact a dollar for zero personal cost.
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Re: How does bitcoin solve the deflation problem?

Post by willthrill81 »

LifeExplorer wrote: Mon May 03, 2021 3:52 pm I can't wrap my head around this.

I google and read a few articles but all of them are just pitching for the wondercoin.
As long as the number of BTC users increase at a faster rate than the inflation of BTC, which is already very low, there will be deflation in the currency, and the nominal price of BTC vis a vis the USD will go up. This has been known all along.

This is a feature, not a bug, for many, who want to see the value of BTC go up over time. But it would be absolutely horrendous to have debt denominated in BTC.
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Re: How does bitcoin solve the deflation problem?

Post by ensign_lee »

LifeExplorer wrote: Mon May 03, 2021 4:52 pm
senex wrote: Mon May 03, 2021 4:10 pm Bitcoin itself, being an anonymous algorithm, doesn't have an official position.

The arguments I've heard from some of its advocates is that the "deflation problem" isn't actually a problem. People have routinely bought things, even when they expected it to be cheaper next year: computers, phones, etc.

If you want to understand the arguments between mainstream economics (which is pro-debasement) and sound money, try reading some articles about the Austrian school of economics (Mises, etc).
They buy things and expect them to be cheaper because those things have immediate utility and the cost is not very high.

Would a company invest 10 million in Bitcoin currency knowing it would only cost them 9 million next year?
If bitcoin had a deflationary problem, your last question would be "would a company invest 10 million in bitcoin knowing it would cost them 12 million the next year?"

The "problem" however would be that would be that debtholders would be hard pressed to ever borrow money when they not only have to pay interest, but the value of what they are paying back *also* increases at loan payback.
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Re: How does bitcoin solve the deflation problem?

Post by adam1712 »

senex wrote: Tue May 04, 2021 8:55 am
LifeExplorer wrote: Mon May 03, 2021 4:52 pm Would a company invest 10 million in Bitcoin currency knowing it would only cost them 9 million next year?
Maybe I misunderstood what you meant by "the deflation problem."

The supply of dollars is increasing, and the supply of bitcoin is fixed, so one would expect bitcoin to be worth more dollars each year, if other aspects of supply/demand remain fixed; equivalently, one would expect a bitcoin to buy more goods next year, and a dollar to buy fewer goods next year.
But if goods earn less bitcoin each year, why would anybody invest in their business? Why would a farmer buy seeds when the crop will earn less in the future? Why buy steel and other inputs when the manufactured good will earn less? You are better off just buying and sitting on your bitcoins.
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Re: How does bitcoin solve the deflation problem?

Post by steve r »

senex wrote: Mon May 03, 2021 4:10 pm The arguments I've heard from some of its advocates is that the "deflation problem" isn't actually a problem. People have routinely bought things, even when they expected it to be cheaper next year: computers, phones, etc.

If you want to understand the arguments between mainstream economics (which is pro-debasement) and sound money, try reading some articles about the Austrian school of economics (Mises, etc).
grok87 wrote: Mon May 03, 2021 5:06 pm https://en.wikipedia.org/wiki/Cross_of_Gold_speech
wrote: You shall not crucify mankind upon a cross of gold
Serious question and I am trying to be mindful of BH policy on politics, but is the Crypto currency divide routed in ideology? Is there a group that the current system hurts the way arguably the gold standard hurt farmers?

To my way of thinking, NO. At most an old guard / new way debate, but perhaps I am missing something. :confused
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steve r
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Re: How does bitcoin solve the deflation problem?

Post by steve r »

This thread interest me in a way other crypto threads have not.

But rather than solve the deflation problem, it seems to be doing the opposite.

The price / value of a house, (my house, your house, most any house) went from thousands of bitcoin to perhaps a small handful. Is that not deflation? :confused

Or perhaps the flaw in my thinking is in thinking in terms of traditional currencies. I do not think even Bitcoin activist consider it "CURRENTLY" the equivalent of a traditional currency (though perhaps in the future).
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Re: How does bitcoin solve the deflation problem?

Post by senex »

adam1712 wrote: Tue May 04, 2021 9:53 am But if goods earn less bitcoin each year, why would anybody invest in their business? Why would a farmer buy seeds when the crop will earn less in the future? Why buy steel and other inputs when the manufactured good will earn less? You are better off just buying and sitting on your bitcoins.
This is a good question. I don't know what a bitcoin enthusiast would say. I would say that speculative business ventures will decrease, all else being equal, if money holds its value better. I would doubt it goes to zero, because I expect there are always plenty of people who either (a) want to get rich faster, or (b) are relatively unmotivated by incremental wealth.

I think there is fairly wide agreement that low interest rates, and expansion of money supply, usually increase short-term economic activity. And that when carrying that reasoning to Zimbabwe levels (print $100 trillion bills), economic activity halts due to breakdown of the price mechanism. The disagreement lies in what middle point is prudent and sustainable, what level of economic whiplash is possible/acceptable, and whether that middle point should be set by central planners or the free market.
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Re: How does bitcoin solve the deflation problem?

Post by senex »

steve r wrote: Tue May 04, 2021 9:55 am Serious question and I am trying to be mindful of BH policy on politics, but is the Crypto currency divide routed in ideology? Is there a group that the current system hurts the way arguably the gold standard hurt farmers?

To my way of thinking, NO. At most an old guard / new way debate, but perhaps I am missing something. :confused
A descriptive (not prescriptive) discussion of its origins, claims, and economic basis is useful for evaluating bitcoin as an investment. I think we're still ok on forum rules.

The origin remains a mystery. No one knows if Satoshi was a raving libertarian, an aloof math/tech geek, the NSA, etc.

Many early adopters of bitcoin were tech enthusiasts (blockchain is cool) or libertarian enthusiasts (money outside the govt's control is cool) or populists (money outside the banking system is cool).
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Re: How does bitcoin solve the deflation problem?

Post by adam1712 »

steve r wrote: Tue May 04, 2021 10:02 am This thread interest me in a way other crypto threads have not.

But rather than solve the deflation problem, it seems to be doing the opposite.

The price / value of a house, (my house, your house, most any house) went from thousands of bitcoin to perhaps a small handful. Is that not deflation? :confused

Or perhaps the flaw in my thinking is in thinking in terms of traditional currencies. I do not think even Bitcoin activist consider it "CURRENTLY" the equivalent of a traditional currency (though perhaps in the future).
The title of this thread is a little unclear but I think what is meant is that it appears bitcoin currently has a deflation problem. The question then is how would it be solved.

I think most would say typical government fiat currencies have more of an inflation problem while bitcoin has more of a deflation problem.

While bitcoin may not be currently equivalent to traditional currency, essentially it's value only comes from being a currency either now or in the future since it has no physical value.

It remains unclear to me how one can develop an independent digital currency that is both valuable to people and not deflationary which impairs economic growth/prosperity and widespread adoption.
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Re: How does bitcoin solve the deflation problem?

Post by Impatience »

Deflation is not a problem to Bitcoin enthusiasts, it’s a beloved feature. In fact new alt-coins are constantly being marketed as being extra deflationary. In their understanding, deflation is the key to make them rich simply by waiting and holding… whereas inflation is a tool of the government/embedded power structure to siphon wealth from savers.

It also helps to point out that despite the “currency” term in crypto currency, even the most fervent Bitcoin fans tend to not care about its usability as a currency. There are many other coins better suited to serve as a currency, some of which are deflationary others not.
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Re: How does bitcoin solve the deflation problem?

Post by cos »

senex wrote: Tue May 04, 2021 10:22 am The origin remains a mystery. No one knows if Satoshi was a raving libertarian, an aloof math/tech geek, the NSA, etc.

Many early adopters of bitcoin were tech enthusiasts (blockchain is cool) or libertarian enthusiasts (money outside the govt's control is cool) or populists (money outside the banking system is cool).
Considering how active he was in cryptopunk circles and mailing lists before he disappeared, there's a good chance he was all of those things! The mystery around Satoshi is by far one of my favorite things about Bitcoin.
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Re: How does bitcoin solve the deflation problem?

Post by cos »

senex wrote: Tue May 04, 2021 10:12 am The disagreement lies in what middle point is prudent and sustainable, what level of economic whiplash is possible/acceptable, and whether that middle point should be set by central planners or the free market.
I'm curious what kinds of theoretical mechanisms have been thought up for allowing the market to manage inflation (aside from or in addition to setting interest rates). How would such a system look and work? What would need to change to ensure the market generates the optimal outcome?

I have the vaguest recollection of Vitalik Buterin writing about this somewhere, but I'm not so sure…
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Re: How does bitcoin solve the deflation problem?

Post by alex_686 »

senex wrote: Tue May 04, 2021 8:59 am
LifeExplorer wrote: Mon May 03, 2021 8:52 pm
2. Inflatable as more wealth is being created.
yep. 2. is the problem for gold
Right, which is why gold is no longer the currency.
None of these statements is strictly true. Inflation is not necessary for wealth creation. It is mainly useful to those who want lots of foreign wars, bread, and circuses.

Economics has "physics envy," and proffers more certainty than it ought, especially among amateurs. The story of gold is quite complicated.
I will modestly take the other side.

First, while this may be true for Homo Economicus, it is not true for humans. It is cognitively easier to think about inflation. We can handle a inflationary increase in goods better than we can handle a deflationary reduction of our income.

Second, If inflation is a tax on savers, than deflation is a tax on investors. Returns on investments is based on the supply and demand of savings and investments. Deflation favors those with monetary assets. i.e., cash and bonds. Those who are already wealthy. They get a free extra boost in returns for not taking any risk. It reduces the real return of risky long term equity investments.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: How does bitcoin solve the deflation problem?

Post by alex_686 »

cos wrote: Tue May 04, 2021 11:01 am
senex wrote: Tue May 04, 2021 10:12 am The disagreement lies in what middle point is prudent and sustainable, what level of economic whiplash is possible/acceptable, and whether that middle point should be set by central planners or the free market.
I'm curious what kinds of theoretical mechanisms have been thought up for allowing the market to manage inflation (aside from or in addition to setting interest rates). How would such a system look and work? What would need to change to ensure the market generates the optimal outcome?

I have the vaguest recollection of Vitalik Buterin writing about this somewhere, but I'm not so sure…
Under the Credit Theory of Money - the current dominate theory - money is a special form of debt. For every credit a person holds, the assumption is that society will return that value when it is cashed in. Thus the value of money is set by the general consensus of society. The current way we regulate that is through government. Bitcoin stands starkly outside of government.

It is for this reason I doubt that Bitcoin will every be a real currency or a asset.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: How does bitcoin solve the deflation problem?

Post by market timer »

Deflation is not a problem that needs to be solved. In fact, many economic models find modest deflation is optimal. This policy even has a name, the Friedman Rule: https://en.wikipedia.org/wiki/Friedman_rule

People who argue that declining prices would lead people to wait to purchase are confusing deflation with the opportunity cost of money. What matters for decisions about consumption or investment is not the rate of inflation or deflation, but rather the real interest rate. If I know prices are going to decline by 2% next year and the interest rate is 0%, it's the same as if I know prices are going to rise by 2% next year and the interest rate is 4%.
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Re: How does bitcoin solve the deflation problem?

Post by adam1712 »

market timer wrote: Tue May 04, 2021 12:07 pm Deflation is not a problem that needs to be solved. In fact, many economic models find modest deflation is optimal. This policy even has a name, the Friedman Rule: https://en.wikipedia.org/wiki/Friedman_rule

People who argue that declining prices would lead people to wait to purchase are confusing deflation with the opportunity cost of money. What matters for decisions about consumption or investment is not the rate of inflation or deflation, but rather the real interest rate. If I know prices are going to decline by 2% next year and the interest rate is 0%, it's the same as if I know prices are going to rise by 2% next year and the interest rate is 4%.
Modest deflation is likely no problem. The problem is if the deflation is significantly below the real interest rate. If deflation is -5% and the real interest rate is 2%, then the nominal interest rate should be -3%. However, anybody can then get 5% return just by hoarding currency. People will pursue less investments/consumption than what should be expected for a 2% real interest rate.
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Re: How does bitcoin solve the deflation problem?

Post by cos »

alex_686 wrote: Tue May 04, 2021 11:18 am
cos wrote: Tue May 04, 2021 11:01 am
senex wrote: Tue May 04, 2021 10:12 am The disagreement lies in what middle point is prudent and sustainable, what level of economic whiplash is possible/acceptable, and whether that middle point should be set by central planners or the free market.
I'm curious what kinds of theoretical mechanisms have been thought up for allowing the market to manage inflation (aside from or in addition to setting interest rates). How would such a system look and work? What would need to change to ensure the market generates the optimal outcome?

I have the vaguest recollection of Vitalik Buterin writing about this somewhere, but I'm not so sure…
Under the Credit Theory of Money - the current dominate theory - money is a special form of debt. For every credit a person holds, the assumption is that society will return that value when it is cashed in. Thus the value of money is set by the general consensus of society. The current way we regulate that is through government. Bitcoin stands starkly outside of government.

It is for this reason I doubt that Bitcoin will every be a real currency or a asset.
Right, but I'm curious if a programmatic, market-managed mechanism could be implemented such that centralized governance becomes unnecessary, the result being a fully automated, self-regulating, decentralized financial system. As others have mentioned, though, such a currency would likely find itself outcompeted by more attractive deflationary alternatives.

But maybe such a mechanism could make its way into the more centralized cryptocurrencies currently being crafted by central banks? Since everyone has to pay taxes in these currencies, they'll have to accept whatever's baked into them.

Anyways, I'm just riffing here. Regardless of whether such a thing ever gets implemented anywhere, I'm more curious as to whether it's even possible, and if so, what it looks like and how it works. Years ago, it was this intersection between economic theory, computer science, and cryptographic math that got me interested in cryptocurrencies in the first place! Ever since they started taking off as alternative investments and speculative bets, this sort of conversation has fallen by the wayside, crowded out by the masses trying to get rich quick, theory be damned.
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Re: How does bitcoin solve the deflation problem?

Post by cos »

market timer wrote: Tue May 04, 2021 12:07 pm Deflation is not a problem that needs to be solved. In fact, many economic models find modest deflation is optimal. This policy even has a name, the Friedman Rule: https://en.wikipedia.org/wiki/Friedman_rule

People who argue that declining prices would lead people to wait to purchase are confusing deflation with the opportunity cost of money. What matters for decisions about consumption or investment is not the rate of inflation or deflation, but rather the real interest rate. If I know prices are going to decline by 2% next year and the interest rate is 0%, it's the same as if I know prices are going to rise by 2% next year and the interest rate is 4%.
While I agree that those two scenarios are equivalent in theory, hasn't history shown that even mildly deflationary environments grind economies to a halt? After all, homo economicus doesn't exist, and humans are irrational creatures largely motivated by risk aversion.

Although, maybe we've never experienced deflation coupled with 0% interest? Going down the rabbit hole in that Wikipedia article you linked, Friedman's ideas seem very attractive, and I'd personally like to see them implemented. If we've never experienced such an environment, however, why not? Why aren't the Fed and the Treasury trying to implement these ideas already?
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Re: How does bitcoin solve the deflation problem?

Post by Thesaints »

The issue with deflation is not "people deferring consumption", but "companies forgoing expansion".
Would you borrow knowing that returning capital will become more and more expensive as time goes by, while your receipts will become smaller and smaller ?
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Re: How does bitcoin solve the deflation problem?

Post by Walkure »

alex_686 wrote: Tue May 04, 2021 11:14 am
senex wrote: Tue May 04, 2021 8:59 am
LifeExplorer wrote: Mon May 03, 2021 8:52 pm
2. Inflatable as more wealth is being created.
yep. 2. is the problem for gold
Right, which is why gold is no longer the currency.
None of these statements is strictly true. Inflation is not necessary for wealth creation. It is mainly useful to those who want lots of foreign wars, bread, and circuses.

Economics has "physics envy," and proffers more certainty than it ought, especially among amateurs. The story of gold is quite complicated.
I will modestly take the other side.
And I will take the Other other side: Physics has "economics envy." The universe is constantly expanding. We aren't sure why. We aren't certain what rate it expands at or why that rate is accelerating. Perhaps the Fed is running a policy of Gravitational Easing :twisted:
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Re: How does bitcoin solve the deflation problem?

Post by supersecretname »

Bitcoin will never be what you spend day to day as a currency. It will be a reserve asset that you store your savings in. Once it stabilizes at a couple million per coin the fluctuations will diminish.

Don't worry, the dollar will still exist and it will continue to inflate away as policy sees fit.
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Re: How does bitcoin solve the deflation problem?

Post by alex_686 »

cos wrote: Tue May 04, 2021 1:08 pm
market timer wrote: Tue May 04, 2021 12:07 pm Under the Credit Theory of Money - the current dominate theory - money is a special form of debt. For every credit a person holds, the assumption is that society will return that value when it is cashed in. Thus the value of money is set by the general consensus of society. The current way we regulate that is through government. Bitcoin stands starkly outside of government.
Right, but I'm curious if a programmatic, market-managed mechanism could be implemented such that centralized governance becomes unnecessary, the result being a fully automated, self-regulating, decentralized financial system. As others have mentioned, though, such a currency would likely find itself outcompeted by more attractive deflationary alternatives.
I am going to say no.

Much like language, money is a social construct and invention. As such, it is fluid and evolving. Thus, it can be "fully automated, self-regulating". There is always going to be a struggle between those who hold the credits and those that hold the debits.

It is however highly decentralized.

As a point of example, deflationary currencies are not that attractive. Gold is the classic example.

Historically, the economy has expanded faster than the gold supply. This has lead to constraints in the economy. There have been numerous occasions when America ran out of gold. The West had commodities to sell, the East had manufactured goods to sell, but Wells Fargo and American Express literally could not haul money (i.e. gold) fast enough. Running out of money people turned to alternatives. i.e., a credit expansion. Bills, bank notes, warehouse receipts (cotton & tobacco), etc.

Everything goes well until it does not. The credit expansion pops. All of that soft money disappears. In panic, all of the hard gold money is also yanked from the system. In short, the system goes bankrupt. The social contract needs to be renegotiated again. How does that happen in a "fully automated, self-regulating" system? Under the gold standard, poorly.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: How does bitcoin solve the deflation problem?

Post by bck63 »

LifeExplorer wrote: Mon May 03, 2021 3:52 pm I can't wrap my head around this.

I google and read a few articles but all of them are just pitching for the wondercoin.
How can fairy dust sold in a pump-and-dump scam solve deflation?
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Re: How does bitcoin solve the deflation problem?

Post by Grt2bOutdoors »

LifeExplorer wrote: Mon May 03, 2021 3:52 pm I can't wrap my head around this.

I google and read a few articles but all of them are just pitching for the wondercoin.
The person holding it will benefit from those buying it at a higher price than what you paid. Those doing the buying though? They might experience some significant deflation when no lemmings show up to buy it in increasing numbers. We call that a pyramid or Ponzi scheme in old language, also known as the greater fool theory. Magical tulips that work until they don’t.
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Re: How does bitcoin solve the deflation problem?

Post by sojersey »

As a digital-native currency… it is also a lot more fractional. You could divide a bitcoin a lot of ways, I think right now it is to 8 digits? But I don't know whether that will be the limit forever.
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Re: How does bitcoin solve the deflation problem?

Post by Thesaints »

sojersey wrote: Tue May 04, 2021 9:03 pm As a digital-native currency… it is also a lot more fractional. You could divide a bitcoin a lot of ways, I think right now it is to 8 digits? But I don't know whether that will be the limit forever.
Doesn’t help with deflation.
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Re: How does bitcoin solve the deflation problem?

Post by vwgrrc »

A currency must be:
1. Relatively stable in relation to the goods and services it represents - you can't have a situation where one buys a chicken for $1 and tomorrow the $1 buys a house.
2. Inflatable as more wealth is being created.
3. Widely accepted either by fiat or tradition.

Bitcoin does none of these.

I think lot of people start with the wrong foot. BTC is not a currency. It's essentially a commodity, but digitalized.
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Re: How does bitcoin solve the deflation problem?

Post by Forester »

Bitcoin doesn't solve any problems. The early adopters dream of being a new robber baron class, where their private wealth becomes a public good, via the plebians being forced to pay them for entry to a new monetary system.

If a government created a digital money, one wouldn't expect an extortionate entry fee, it would be a publicly maintained good like a bridge or roadway. Bitcoin is the opposite of that, it's prospective gatekeeping and charging a toll under the guise of "helping everyone out".
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Re: How does bitcoin solve the deflation problem?

Post by typical.investor »

senex wrote: Tue May 04, 2021 8:55 am
LifeExplorer wrote: Mon May 03, 2021 4:52 pm Would a company invest 10 million in Bitcoin currency knowing it would only cost them 9 million next year?
Maybe I misunderstood what you meant by "the deflation problem."

The supply of dollars is increasing, and the supply of bitcoin is fixed, so one would expect bitcoin to be worth more dollars each year, if other aspects of supply/demand remain fixed; equivalently, one would expect a bitcoin to buy more goods next year, and a dollar to buy fewer goods next year.
Actually, I’d expect next year that a $5 bill buys more candy bars or beer or whatever your fancy next year than $5 in Bitcoin does.

$5 in Bitcoin won’t even cover your transaction costs.

Actually, the cost per transaction in BTC is inflating far faster than the cost of living is.

Ok, transaction fees are -18.52% from yesterday but that is still +906.5% from one year ago.
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Re: How does bitcoin solve the deflation problem?

Post by GregG3 »

vwgrrc wrote: Tue May 04, 2021 11:16 pm
A currency must be:
1. Relatively stable in relation to the goods and services it represents - you can't have a situation where one buys a chicken for $1 and tomorrow the $1 buys a house.
2. Inflatable as more wealth is being created.
3. Widely accepted either by fiat or tradition.

Bitcoin does none of these.

I think lot of people start with the wrong foot. BTC is not a currency. It's essentially a commodity, but digitalized.
If BTC is a digital commodity then what is it used for? If BTC disappeared today would anybody who is not invested in it even noticed it?
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LifeExplorer
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Re: How does bitcoin solve the deflation problem?

Post by LifeExplorer »

GregG3 wrote: Wed May 05, 2021 5:14 am
vwgrrc wrote: Tue May 04, 2021 11:16 pm
A currency must be:
1. Relatively stable in relation to the goods and services it represents - you can't have a situation where one buys a chicken for $1 and tomorrow the $1 buys a house.
2. Inflatable as more wealth is being created.
3. Widely accepted either by fiat or tradition.

Bitcoin does none of these.

I think lot of people start with the wrong foot. BTC is not a currency. It's essentially a commodity, but digitalized.
If BTC is a digital commodity then what is it used for? If BTC disappeared today would anybody who is not invested in it even noticed it?
LOL! My question too. For something to be called a "commodity", it better has some utility and intrinsic value. What's the utility of bitcoin?

An ounce of gold has utility and intrinsic value. So is a barrel of oil.
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Re: How does bitcoin solve the deflation problem?

Post by sojersey »

Thesaints wrote: Tue May 04, 2021 10:42 pm
sojersey wrote: Tue May 04, 2021 9:03 pm As a digital-native currency… it is also a lot more fractional. You could divide a bitcoin a lot of ways, I think right now it is to 8 digits? But I don't know whether that will be the limit forever.
Doesn’t help with deflation.
But if you can cut an item into nearly infinite pieces is deflation still the same as with other stores of value? (I'm not an economist or monetarist, just armchair wondering)
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